SOUTH CAROLINA STUDENT LOAN CORPORATION FINANCIAL AND COMPLIANCE REPORT JUNE 30, 2005

Transcription

1 FINANCIAL AND COMPLIANCE REPORT JUNE 30, 2005

2 CONTENTS INDEPENDENT AUDITOR S REPORT 1 FINANCIAL STATEMENTS STATEMENT OF FINANCIAL POSITION 2 3 STATEMENT OF ACTIVITIES 4 STATEMENT OF CASH FLOWS 5 6 NOTES TO FINANCIAL STATEMENTS 7 16 SUPPLMENTARY INFORMATION SCHEDULE OF FINANCIAL POSITION BY FUND SCHEDULE OF ACTIVITIES BY FUND 19 SCHEDULE OF CASH FLOWS BY FUND SCHEDULE OF PROPERTY AND EQUIPMENT 22 SCHEDULE OF EXPENSES SCHEDULE OF ORGANIZATIONAL DATA 25 FEDERAL REPORTING AND SINGLE AUDIT SECTION SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS 26 INDEPENDENT AUDITOR S REPORT ON COMPLIANCE AND ON INTERNAL CONTROL OVER FINANCIAL REPORTING BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS 27 INDEPENDENT AUDITOR S REORT ON COMPLIANCE WITH REQUIREMENTS APPLICABLE TO EACH MAJOR PROGRAM AND INTERNAL CONTROL OVER COMPLIANCE IN ACCORDANCE WITH OMB CIRCULAR A SCHEDULE OF FINDINGS AND QUESTIONED COSTS 30 SCHEDULE OF SUMMARY OF PRIOR YEAR AUDIT FINDINGS 31 SCHEDULE OF CORRECTIVE ACTION PLAN 32

3 DERRICK, STUBBS & STITH, L.L.P. CERTIFIED PUBLIC ACCOUNTANTS A. David Masters, CPA 508 Hampton Street, 1st Floor Post Office Box 36 Charles R. Statler, Jr., CPA Columbia, South Carolina Alan F. Grimsley, CPA Telephone: (803) Facsimile: (803) Hugh R. Penny, CPA, CISA, CBA H. Warren Counts, Jr., CPA K. Todd Dailey, CPA, CVA INDEPENDENT AUDITOR S REPORT To the Board of Directors South Carolina Student Loan Corporation Columbia, South Carolina We have audited the accompanying statement of financial position of South Carolina Student Loan Corporation as of June 30, 2005, and the related statements of activities and cash flows for the year then ended. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audit. The prior year s summarized comparative information has been derived from the 2004 financial statements and, in our report dated August 25, 2004, we expressed an unqualified opinion on those financial statements. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of South Carolina Student Loan Corporation as of June 30, 2005 and the changes in its net assets and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. In accordance with Government Auditing Standards, we have also issued a report dated August 26, 2005 on our consideration of the Corporation s internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be read in conjunction with this report in considering the results of our audits. Our audit was made for the purpose of forming an opinion on the financial statements of South Carolina Student Loan Corporation, taken as a whole. The accompanying supplementary information on pages is presented for purposes of additional analysis and is not a required part of the basic financial statements. The accompanying schedule of expenditures of federal awards is presented for purposes of additional analysis as required by the U.S. Office of Management and Budget Circular A-133, Audits of States, Local Governments and Non-Profit Organizations, and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. Columbia, SC August 26, 2005 Member: American Institute of Certified Public Accountants / South Carolina Association of Certified Public Accountants

4 STATEMENT OF FINANCIAL POSITION JUNE 30, 2005 (WITH COMPARATIVE AMOUNTS FOR 2004) Totals Temporarily Memorandum ASSETS Unrestricted Restricted Total Only Current Assets Cash and cash equivalents $ 16,740,489 $ 140,790,266 $ 157,530,755 $ 81,901,207 Investments 160, , ,186 Current portion of student loan receivables 50, ,856, ,906, ,823,955 Interest due from borrowers 43,249 26,222,292 26,265,541 26,637,740 Due from United States Department of Education 26 14,056,872 14,056,898 7,053,917 Due from SC State Education Assistance Authority 448,078 92,722,616 93,170,694 28,808,236 Accrued investment income 3, , ,141 78,791 Miscellaneous operating receivables 12,061 12, Prepaid expenses 119, ,442 30,238 Due from (to) other funds 75,926 (75,926) Total current assets 17,652, ,828, ,480, ,483,076 Investments and Long-Term Receivables Other student loan receivables less current portion 1,658,389 1,866,499,389 1,868,157,778 1,674,359,577 Teacher loans receivable - net allowance for teacher loan cancellations of $ 16,041,007 and current portion 5,294,788 5,294,788 5,580,712 Deferred cost of issuance of bonds 3,149,978 3,149,978 3,154,621 Total investments and long-term receivables 1,658,389 1,874,944,155 1,876,602,544 1,683,094,910 Property and Equipment Land 565, , ,000 Building 2,431,329 2,431,329 2,431,329 Furniture and equipment 1,814,680 1,814,680 2,039,071 Automobiles 42,764 42,764 41,049 Less, accumulated depreciation (1,440,587) (1,440,587) (1,564,991) Net property and equipment 3,413,186-3,413,186 3,511,458 Total assets $ 22,724,217 $ 2,478,772,196 $ 2,501,496,413 $ 2,107,089,444 See notes to financial statements.

5 STATEMENT OF FINANCIAL POSITION JUNE 30, 2005 (WITH COMPARATIVE AMOUNTS FOR 2004) Totals Temporarily Memorandum LIABILITIES AND NET ASSETS Unrestricted Restricted Total Only Current Liabilities Current portion of notes payable - finance loans $ $ 76,400,000 $ 76,400,000 $ 64,800,000 Current maturities of bonds payable 225,169, ,169, ,241,475 Warehouse financing 141,133, ,133,909 Interest payable 2,244,985 2,244,985 1,111,826 Accounts payable 53, , ,444 63,724 Accrued pension payable 218, , ,956 Compensated absences 300,128 35, , ,760 Retiree medical insurance payable 1,610,867 1,610, ,913 Due to SC State Education Assistance Authority 9,678,139 9,678,139 8,214,023 Total current liabilities 2,182, ,042, ,225, ,872,677 Long-Term Debt Bonds payable less current maturities and bond premiums and discounts of $ 3,747,088 1,086,855,912 1,086,855,912 1,131,810,720 Notes payable - finance loans less current maturities 696,004, ,004, ,749,392 Total long-term debt - 1,782,860,765 1,782,860,765 1,590,560,112 Total liabilities 2,182,558 2,237,903,257 2,240,085,815 1,872,432,789 Net Assets Temporarily restricted: For bond indentures - current debt service 26,101,084 26,101,084 22,501,568 For bond indentures 192,069, ,069, ,319,989 For teacher loans 22,244,312 22,244,312 22,458,756 For warehouse financing 453, ,736 Total temporarily restricted 240,868, ,868, ,280,313 Unrestricted 20,541,659 20,541,659 34,376,342 Total net assets 20,541, ,868, ,410, ,656,655 Total liabilities and net assets $ 22,724,217 $ 2,478,772,196 $ 2,501,496,413 $ 2,107,089,444 See notes to financial statements.

6 STATEMENT OF ACTIVITIES (WITH COMPARATIVE AMOUNTS FOR 2004) Revenue Income from United States Department of Education Student loan interest - subsidized Totals Temporarily Memorandum Unrestricted Restricted Total Only $ $ 15,243,932 $ 15,243,946 $ 14,469,282 Special allowances 88 37,139,732 37,139,820 12,859,558 Student loan interest - non-subsidized 323,508 67,018,798 67,342,306 60,060,055 Investment income 295,420 2,478,336 2,773,756 1,495,102 Unrealized gain (loss) on investments 11,820 (118,511) (106,691) (121,577) Late charges 1,880 1,370,213 1,372, ,345 Miscellaneous payments of student loans 5,130 5,130 9,289 State appropriations - Department of Education 4,831,932 4,831,932 4,377,048 Building rental income 194, ,776 52,005 Remittance from SC State Education Assistance Authority for operating cost 4,198,752 4,198,752 6,046,015 Net assets released from restrictions 87,380,936 (87,380,936) Total revenue 92,407,194 40,588, ,995, ,123,122 Expenses Personnel 6,218,889 6,218,889 5,737,232 Contractual services 830, , ,454 General operating 1,696,620 1,696,620 1,762,729 Interest on debt 34,204,327 34,204,327 17,927,494 TLP cancellations 6,392,751 6,392,751 5,573,014 Amortization of deferred cost of bond issuance 1,163,743 1,163,743 1,578,864 Payments to SC State Education Assistance Authority for student loan income 22,670,453 22,670,453 5,045,972 Loan fees 11,084,863 11,084,863 8,779,508 Reinsurance expense 236, , ,271 Borrower incentives 18,353,274 18,353,274 15,485,920 Broker dealer fees 2,070,901 2,070,901 1,856,612 Building rental expenses 339, , ,762 Other 979, , ,501 Total expenses 106,241, ,241,877 65,068,333 Change in net assets (13,834,683) 40,588,626 26,753,943 35,054,789 Net Assets Beginning 34,376, ,280, ,656, ,601,866 Ending $ 20,541,659 $ 240,868,939 $ 261,410,598 $ 234,656,655 See notes to financial statements.

7 STATEMENT OF CASH FLOWS (WITH COMPARATIVE AMOUNTS FOR 2004) Totals Temporarily Memorandum Unrestricted Restricted Total Only Cash Flows from Operating Activities Change in net assets $ (13,834,683) $ 40,588,626 $ 26,753,943 $ 35,054,789 Adjustments to reconcile change in net assets to net cash provided by (used in) operating activities Depreciation 283, , ,774 Amortization of premiums and discounts on bonds payable 214, , ,791 Amortization of cost of bond issuance 949, ,552 1,046,072 Changes in operating assets and liabilities (Increase) decrease in due from Department of Education 13 (7,002,994) (7,002,981) (1,284,410) (Increase) decrease in due from SCSEAA (348,155) (64,014,303) (64,362,458) (28,725,061) (Increase) decrease in interest due from borrowers 525,129 (152,930) 372,199 2,976,969 (Increase) decrease in accrued investment income (3,365) (176,985) (180,350) 90,213 (Increase) decrease in miscellaneous receivables (11,255) (11,255) 57,570 (Increase) decrease in prepaid expenses (89,204) (89,204) (25,323) Increase (decrease) in interest payable 169, ,400 (119,659) Increase (decrease) in accounts payable (10,442) 1,344,921 1,334,479 (157,361) Increase (decrease) in accrued pension expense (57,675) (57,675) (513,123) Increase (decrease) in compensated absences 74,939 6,726 81,665 49,686 Increase (decrease) in retiree medical insurance payable 698, ,954 Increase (decrease) in due to SCSEAA 1,464,116 1,464,116 1,931,163 Due to (from) other funds (69,668) 69,668 Net cash provided by (used in) operating activities (12,841,886) (26,540,012) (39,381,898) 11,076,090 Cash Flows from Investing Activities Purchase of property and equipment (185,254) (185,254) (3,334,432) Purchase and issuance of student loans (876,213) (1,008,290,668) (1,009,166,881) (727,051,649) Principal payments on student loans 18,230, ,949, ,179, ,493,651 Teacher loan cancellations 6,392,751 6,392,751 5,573,014 Unrealized (gain) loss on investments (11,820) (11,820) (70,577) Net cash provided by (used in) investing activities $ 17,156,763 $ (264,948,304) $ (247,791,541) $ (219,389,993) See notes to financial statements.

8 STATEMENT OF CASH FLOWS (WITH COMPARATIVE AMOUNTS FOR 2004) Totals Temporarily Memorandum Unrestricted Restricted Total Only Cash Flows from Financing Activities Proceeds from financing loans $ $ 647,181,033 $ 647,181,033 $ 648,162,256 Payments on financing loans (398,325,572) (398,325,572) (385,685,638) Proceeds from warehouse financing 141,133, ,133,909 Proceeds from bond issuance 180,000, ,000,000 Payments of bonds (206,241,475) (206,241,475) (130,363,888) Payment of costs of bond issuance (944,908) (944,908) (473,418) Net cash provided by financing activities - 362,802, ,802, ,639,312 Net increase (decrease) in cash and cash equivalents 4,314,877 71,314,671 75,629,548 (76,674,591) Cash and cash equivalents Beginning 12,425,612 69,475,595 81,901, ,575,798 Ending 16,740, ,790, ,530,755 81,901,207 Supplemental Disclosures of Cash Flow Information Cash payments for interest - 33,071,168 33,071,168 18,047,153 Supplemental Disclosures of Non-Cash Transactions Retirement of fixed assets - investing activities 407, , ,483 Write-off of accumulated depreciation related to retired assets - investing activities $ 407,931 $ - $ 407,931 $ 209,483 See notes to financial statements.

9 Notes to Financial Statements Note 1. Summary of Significant Accounting Policies Reporting entity: The South Carolina Student Loan Corporation (Corporation) was incorporated November 15, 1973 under the Laws of the State of South Carolina. The Corporation is exempt from income taxes under Section 501(c)(3) of the Internal Revenue Code. Its corporate goal is to receive, disburse and administer funds exclusively for educational purposes without pecuniary gain or profit to its members and to aid in the fulfillment of the desire and direction of the People of South Carolina in making loans available to students and parents to attend eligible post secondary institutions. Funds from various sources are administered by the Corporation to achieve this goal. The Corporation administers the operations of the South Carolina State Education Assistance Authority (Authority). The Authority is a body politic and corporate and a public instrumentality of the State of South Carolina. The Authority is part of the State of South Carolina created by Act No. 433 of the Acts and Joint Resolutions of the General Assembly for the year 1971, now codified as Chapter 115, Title 59 of the Code of Laws of South Carolina, 1976 as amended. The Authority is governed by its members, who under the Act are the members of the State Budget and Control Board (Board). The Board consists of five (5) members by virtue of their position in state government. They are the Governor, Treasurer, Comptroller General, Chairman of Senate Finance Committee and Chairman of South Carolina House of Representatives Ways and Means Committee. The basic, but not the only, criteria for including a component unit in the reporting entity is the governing body's oversight responsibility for such component unit. Financial accountability is the most important element of oversight responsibility. Neither the Authority nor the Corporation is considered a component unit of the other because each is a legally separate organization and not financially accountable to/for the other. The accompanying financial statements present the financial position, results of operations and cash flows solely of the South Carolina Student Loan Corporation. Overall operating arrangement: The Authority, as a guaranty agency, has approved the South Carolina Student Loan Corporation (Corporation) as an eligible lender to administer the Federal Family Education Loan Program. It is the duty of the Corporation to process applications, make student loans and collect principal, interest, fees and penalties on such loans. Loans may or may not be subsidized. Interest is paid on subsidized loans during the enrolled, grace, and deferred periods by the U.S. Department of Education. Upon entering the repayment period, the interest is paid by the borrower. Also, the U.S. Department of Education pays the Corporation a special allowance on the unpaid principal of the loans which is based on a variable percentage rate. The Corporation finances these loans using several sources. One source is the issuance of tax-exempt revenue bonds by the Authority. The Corporation, using the proceeds of these bonds as described in Note 7, makes loans. The Corporation remits income on these loans to the Authority as it is received as required by loan agreements. The operations of the Authority are administered by employees of the Corporation. The Authority reimburses the Corporation upon request for the actual operating costs and expenses plus reasonable capital costs incurred in the administration of the loans financed by the Authority s bonds in accordance with a previously approved budget. Because of the scarcity of tax-exempt private activity bond allocation from the State and because of the yield limitation for loans financed with tax-exempt bonds, the Corporation issued taxable Education Loan Revenue Bonds for the first time in the year ended June 30, 1997.

10 Notes to Financial Statements Note 1. Summary of Significant Accounting Policies (Continued) Overall operating arrangement (continued): During the year, the Corporation began administering the Teacher Loan Program (TLP). The TLP is a part of the Education Improvement Act of 1984 passed by the South Carolina General Assembly. The Corporation was named in the Act as the administrator of this program and the funds for operations and for making loans are provided by state appropriations. The intent of the program is to attract, through financial assistance, talented individuals and to encourage them to enter teaching in areas of critical need within the state. Loans are canceled at 20% to 33% per year for each year of teaching in a critical subject and/or location. These loans are repaid by the borrower if the borrower does not teach. TLP loans made for academic years before are guaranteed by the Authority. Loans made for academic years or after are non-guaranteed. During the year, the Corporation began making and servicing alternative loans through the Palmetto Assistance Loan (PAL) Program. PAL offers supplemental loans for students and parents of students enrolled at least half-time in an eligible school and for fourth year medical students seeking their residency and relocating. These loans are funded from Corporation accumulated unrestricted net assets and bond funds. In March 2005, the Corporation entered into a financing agreement with the Royal Bank of Canada to provide additional funding for student loans. See Note 8. Basis of accounting: These statements are prepared on the accrual method of accounting recognizing income when earned regardless of when received and expenses when incurred regardless of when paid. Display of net assets by class: The Corporation adheres to the disclosures and display requirements of the Financial Accounting Standards Board (FASB) as set forth in Statement of Financial Accounting Standards No. 117, Financial Statements of Not-for-Profit Organizations. SFAS No. 117 establishes standards for external financial reporting by non-profit organizations and requires that resources be classified for accounting and reporting purposes as follows: Unrestricted Net Assets - Net assets that are not subject to restrictions. These net assets, including Board designated, are legally unrestricted and can be used in any Corporation activity. Temporarily Restricted Net Assets - Net assets subject to restrictions that will be met either by actions of the Corporation and/or the passage of time. These net assets are made up of guaranteed student loans from various funding sources. Permanently Restricted Net Assets - Net assets subject to stipulations that must be maintained permanently by the Corporation. The Corporation does not have any such net assets. Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and cash equivalents: For purposes of reporting cash flows, the Corporation considers all certificates of deposit, regardless of maturity, and Treasury Bills, commercial paper and money market funds, including those that are classified as restricted assets, with a maturity of three months or less, to be cash equivalents.

11 Notes to Financial Statements Note 1. Summary of Significant Accounting Policies (Continued) Concentration risk: The Corporation maintains its cash in bank deposit accounts, which, at times, may exceed federally insured limits. At June 30, 2005, the amount on deposit in one commercial bank exceeded the insurance limits of the FDIC by approximately $ 2,020,000. The Corporation has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents. Investments: Investments are valued at market value. Realized and unrealized gains and losses on sale of investments are determined based on the cost of investments. Allowance for teacher loan cancellations: The allowance for cancellations on teacher loans represents the Corporation s estimate of teachers who will teach in critical need areas in South Carolina who can annually cancel up to 20% to 33% of their loan balances. In making the estimate, the Corporation considers the trend in the loan portfolio and current operating information. The allowance is based on total teacher loan cancellations times the expected cancellation rate. The evaluation is inherently subjective and the allowance could significantly change in the future. The allowance was $ 16,041,007 at June 30, Property and equipment: Property and equipment costing over $ 5,000 are capitalized at cost when purchased. Depreciation has been provided using the straight-line method over useful lives of three to ten years for furniture and equipment, three years for automobiles and computers and thirty-nine years for the building. Amortization of deferred cost of issuance of bonds and bond premiums and discounts: Cost of issuance of bonds and bond premiums and discounts are being amortized over the lives of the bond issues on a straight-line basis and are included in operating expenses. Compensated absences: Annual leave is earned at the rate of 12 to 25 days per year depending on length of employment. Employees are expected to use at least one week (5 consecutive days) each year. An employee may not carry forward more than 5 vacation days to the next year without his/her supervisor's permission. Earned, but unused, annual leave will be paid when an employee terminates his/her employment except when this termination is involuntary or inadequate notice is given. Sick leave is earned at the rate of 7 to 10 days per year depending on length of employment. An employee may not carry forward more than 60 sick days to the next year without his/her supervisor's approval. Employees are not paid for earned, but unused, sick days upon termination of employment. Comparative amounts: The financial statements include certain prior-year summarized comparative information in total but not by net asset class. Such information does not include sufficient detail to constitute a presentation in conformity with accounting principles generally accepted in the United States of America. Accordingly, such information should be read in conjunction with the Corporation's financial statements for the year ended June 30, 2004, from which the summarized information was derived. Note 2. Cash and Cash Equivalents Cash and Cash Equivalents include demand deposits and short-term investments of less than three months as follows: Unrestricted Cost Market Value Demand deposits $ 2,216,233 $ 2,216,233 Repurchase agreements 404, ,611 South Carolina state treasurer pool 271, ,938 U.S. agency bond 4,697,707 4,697,707 Corporate bonds 9,150,000 9,150,000 Total unrestricted $ 16,740,489 $ 16,740,489

12 Notes to Financial Statements Note 2. Cash and Cash Equivalents (Continued) Temporarily Restricted Demand deposit $ 310 $ 310 Money market fund 10,610,867 10,610,867 Repurchase agreements 266, ,404 Collateralized demand deposit 39,174,572 39,174,572 South Carolina state treasurer pool 6,604,603 6,645,997 Guaranteed investment contracts 84,092,117 84,092,116 Total temporarily restricted $ 140,748,873 $ 140,790,266 Cash and Cash Equivalents included in the Teacher Loan Program include the South Carolina State Treasurer Pool totaling $ 6,645,997. Note 3. Investments Investments consist of common stock. Investments market value is determined by quoted market values and consist of the following: Carrying Market Value Value Unrestricted Common stock $ - $ 160,006 Note 4. Amounts Due from/to the Corporation The $ 9,678,139 amount due to the Authority represents funds due for income earned but not yet received by the Corporation from the Department of Education and borrowers payments at June 30. These funds will be remitted to the Authority when received or by the tenth of each month. The Authority also owes the Corporation funds collected on their behalf of $ 93,170,694. Funds collected on behalf of the Corporation are required to be paid to the Corporation by the tenth of each month. Note 5. Federal Family Education Loans (FFEL) and Federal Reinsurance of FFEL Loans In 2005 and 2004, these loans bear interest at a fixed rate of 2.875% to 12% or an annual variable rate of 2.77% to 4.32%, which is reset each July 1 and which is equal to the bond equivalent rate of the 91-day or 52-week Treasury Bill, determined at the final auction held prior to the immediately preceding June 1, plus 1.7 to 3.25 percent with a cap on the rate of 8.25 to percent. These loans are repayable over a period of five (5) to thirty (30) years with a minimum payment of $ 360 or $ 600 per year. Repayment of principal may be scheduled to begin within sixty (60) days of final disbursement or six (6) to ten (10) months after the student graduates or ceases to be enrolled on at least a half-time basis in an eligible institution. Loans are insured against death, disability and default by the Authority and are reinsured by the U. S. Department of Education up to 100% for loans made prior to October 1, 1993, up to 98% for loans made on or after October 1, 1993 but before October 1, 1998, and 95% for loans made on or after October 1, Prior to March 1, 1999, loan recipients paid an amount equal to 1/2 of 1% of the principal amount of the loan as a guaranty premium. Since March 1, 1999, guaranty premiums have not been charged, however, the Authority reserves the right to reinstate such charges at such times and in such lawful amounts as it deems appropriate. Loans may or may not be subsidized. Interest is paid on subsidized loans during the enrolled, grace and deferred periods by the U. S. Department of Education. Upon entering the repayment period, the interest is paid by the borrower.

13 Notes to Financial Statements Note 5. Federal Family Education Loans (FFEL) and Federal Reinsurance of FFEL Loans (Continued) From August 1981 to October 1992, all student loan recipients paid an origination fee equal to 5% of the loan amount. From October 1992 to July 1994, an additional origination fee of 1.5% was paid by recipients of unsubsidized loans. As of July 1994, all loan recipients paid a reduced origination fee of 3%. As of May 1, 2001 the origination fee was reduced by the Corporation to 1% and subsequently on January 1, 2002 was suspended for all loan recipients. The origination fees of 3% reduce the amount of interest subsidy the federal government pays to lenders on behalf of student borrowers whether collected or waived. Note 6. Bonds Payable The Corporation issued Education Loan Revenue Bonds for the first time in the year ended June 30, All of the Corporation's bonds are secured only by loans funded by bond proceeds, related revenue from such loans, investments and earnings on investments in related accounts and by a debt service reserve funded from bond proceeds. The bond resolution permits the Corporation to accumulate collections from borrowers to pay principal and interest on bonds as due. The bonds do not constitute a debt, liability or obligation of the State of South Carolina or a pledge of the faith and credit of the State of South Carolina. The current debt service account contains assets equal to the interest and principal accumulated to make the next payments of principal and interest due. As of June 30, 2005, the Corporation was required to have assets deposited in the current debt service account of $ 26,101,084. The Education Loan Revenue Bonds as of June 30, 2005 are as follows: Balance Issued Balance Outstanding (Retired) Outstanding Issued Original Amount Maturity Date 6/30/04 During FY 05 6/30/05 July 11, 1996 $ 223,900,000 9/1/26 $ 85,000,000 $ $ 85,000,000 May 15, ,300,000 12/1/07-9/1/27 82,160,677 ( 2,160,677 ) 80,000,000 May 14, ,400,000 9/1/ ,400, ,400,000 July 18, ,000,000 6/1/ ,971,798 (122,971,798) May 23, ,000,000 6/1/ ,481,000 (81,109,000) 274,372,000 April 30, ,000,000 6/1/ ,000, ,000,000 June 25, ,000,000 6/1/33-6/1/43 275,000, ,000,000 Nov. 10, ,000,000 6/1/34 180,000, ,000,000 $ 1,342,013,475 $( 26,241,475 ) $ 1,315,772,000 The Corporation s Auction Rate Bonds totaled $ 831,400,000 as of June 30, 2005, and have variable interest rates determined by auctions every 7 to 28 days, subject to a maximum of the lesser of 20% or certain variable caps that vary among the series. The Corporation's LIBOR Indexed Bonds totaled $ 297,186,000 as of June 30, 2005 and have variable interest rates equal to three-month LIBOR plus 0.13% to 0.15% as adjusted quarterly. The Corporation s CP Indexed Bonds totaled $ 187,186,000 and have variable interest rates ranging from the three-month Commercial Paper indexed rate plus 0.24% to 0.25% as adjusted weekly or monthly. Throughout the year ended June 30, 2005, none of the rates exceeded 4.00%. Future interest payment projections are based upon the four year weighted average rate at June 30, 2005, which was 3.63 %. The Treasury Indexed Bonds, CP Indexed Bonds, and LIBOR Indexed Bonds are not subject to redemption prior to maturity but are subject to pro rata principal reduction payments prior to maturity based on targeted amortization schedules. Failure by the Corporation to make any payment contemplated by an applicable Targeted Amortization Schedule does not constitute a payment default. The Corporation s intent is to follow these payment schedules. The Auction rate bonds are subject to redemption in whole or in part at par plus accrued interest on the first day of any auction period, provided targeted amortization payments on other bonds have been made in accordance with the respective Targeted Amortization Schedules as of the date of such redemption.

14 Notes to Financial Statements Note 6. Bonds Payable (Continued) As of June 30, 2005, the scheduled debt service to retire these bonds is as follows: Principal Interest Totals 2006 $ 225,169,000 $ 42,965,957 $ 268,134, ,449,000 35,843, ,292, ,754,000 30,420,332 70,174, ,179,820 30,179, ,179,820 30,179, ,179,820 30,179, ,179,820 30,179, ,179,820 30,179, ,179,820 30,179, ,179,820 30,179, ,179,820 30,179, ,179,820 30,179, ,179,820 30,179, ,179,820 30,179, ,179,820 30,179, ,179,820 30,179, ,179,820 30,179, ,179,820 30,179, ,179,820 30,179, ,179,820 30,179, ,179,820 30,179, ,000,000 27,608, ,608, ,000,000 24,674, ,674, ,190,320 24,190, ,190,320 24,190, ,190,320 24,190, ,190,320 24,190, ,000,000 23,558, ,558, ,400,000 10,208, ,608, ,395,800 2,395, ,395,800 2,395, ,395,800 2,395, ,395,800 2,395, ,395,800 2,395, ,395,800 2,395, ,395,800 2,395, ,395,800 2,395, ,000,000 66,000,000 Totals $ 1,315,772,000 $ 854,444,114 $ 2,170,216,114

15 Notes to Financial Statements Note 7. Notes Payable - Finance Loans Each bond resolution of the Authority requires that all funds advanced to SCSLC by the Authority for the purpose of making student loans be evidenced by a loan agreement, assignment of collateral and assignment of revenues between the two parties, with the student loans providing security to the bond trustee. Advances to SCSLC from the Authority s 1993 General Resolution are made pursuant to a loan agreement dated August 31, 1993, and advances to SCSLC from the Authority s 2002 General Resolution are made pursuant to a loan agreement dated June 12, Each loan is calculated as set forth in the respective loan agreements. The finance loans as of June 30, 2005 and 2004 are as follows: Authority Bond Balance Balance Resolution 6/30/05 6/30/ $ 388,842,022 $ 323,895, ,562, ,653,798 Total $ 772,404,853 $ 523,549,392 Note 8. Warehouse Financing On March 22, 2005, the Corporation entered into a Warehouse Line financing agreement with Royal Bank of Canada providing for advances to the Corporation not to exceed an aggregate outstanding principal balance of $ 150,000,000 and is secured by student loan receivables. The borrowing period ends March 21, An extension is not guaranteed, but may be extended by written agreement among the borrower, the servicer, the lender, the alternative lender and the facility agent, with notice to the trustee. If the financing agreement is not extended, the Corporation must immediately find a new financing source. During the year, the Corporation received advances totaling $ 141,133,909 on the Warehouse Line which is also the June 30, 2005 balance. No principal payments were made during the year. Interest is paid monthly at the commercial paper rate plus 0.27% and the interest rate ranged from 3.12% to 3.54%. The agreement calls for certain covenants which include maintaining at least a $ 100 million net asset balance and a debt reserve account of 0.5% of the outstanding loan balance. The Corporation was in compliance with all covenants at June 30, Note 9. Special Allowance Income As an inducement to the lender to make guaranteed student loans, the U. S. Department of Education pays the Corporation a special allowance on the unpaid principal of the loans which is based on a variable percentage rate. It was instituted to assure that the interest rate and other limitations of the Higher Education Act, in the context of the current money market conditions, would not adversely affect access to student loans or cause the rate of return on student loans to be less than equitable. Note 10. Employee Benefit Plans The Corporation provides retirement benefits through the South Carolina Student Loan Money Purchase Pension Plan for all employees who have completed one year of service and attained age 21. The Corporation has adopted the Branch Banking & Trust Co. (BB&T) Money Purchase Pension Plan. BB&T is the Trustee of the Plan. This is a defined contribution plan in which the employer contributes 5.6% of the participant's total annual compensation plus 5.6% of compensation exceeding the social security wage base. Contributions are paid monthly. A participant is 20% vested after three years service and 100% vested after seven years. A participant receives normal retirement at age sixty-five. At termination of employment or reaching normal retirement age, the participant has the right to elect to receive all or any portion of his vested

16 Notes to Financial Statements Note 10. Employee Benefit Plans (Continued) benefit derived from employer contributions. Voluntary contributions are not permitted. Forfeitures under the plan reduce the employer's contribution in the year following the plan year in which the forfeiture occurs. The total retirement expense for 2005 is $ 203,440 and is fully funded. The Corporation also sponsors a defined benefit pension plan and a post-retirement health care plan covering substantially all employees with one year of service and over 21 years of age. The Defined Benefit Pension Plan provides benefits based on the average of a participant s highest five consecutive years of pay. The benefit formula uses one percent of this average pay times years of service not to exceed 30 years. The Post-Retirement Health Care Plan pays 3% of the premium for the standard plan times years of service starting with 15% at five years of service up to 90% not to exceed the cost of the total premium. The Corporation pension funding policy is to make at least the minimum annual contribution that is actuarially computed by the projected unit credit method required by the Plan. The net pension expense for this Defined Benefit Pension Plan totaled $ 455,925, plus $ 36,786 of administrative expenses, totaling $ 492,711 for the year ended June 30, The Authority contributed $ 161,372 to the expense for this Plan for its employees for the year ended June 30, The net postretirement health care plan expense totaled $ 698,954 with the Authority contributing $ 251,623. The components of the cost charged to expense consisted of the following: Post-Retirement Defined Benefit Health Care Plan Plan Service cost (benefits earned) $ 273,943 $ 243,481 Interest cost on projected benefit obligation 314, ,790 Actual return on assets (310,510) Net amortization and deferral 228, ,683 Minimum liability (50,094) Net pension cost $ 455,925 $ 698,954 The following sets forth the Plan s funded status as of June 30, The measurement date of the projected benefits obligation and Plan assets was June 30, Post-Retirement Defined Benefit Health Care Plan Plan Actuarial Present Value of Benefit Obligations Vested benefit obligation $ 4,855,325 $ 1,070,695 Non-vested benefit obligation 146,054 3,086,655 Accumulated benefit obligation 5,001,379 4,157,350 Projected benefits (5,823,387) (4,157,350) Plan assets at fair value 4,783,098 Projected benefit obligation (in excess of) plan assets (1,040,289) (4,157,350) Unrecognized prior service cost 637, ,951 Unrecognized net loss 1,489,392 2,039,532 Required additional minimum liability (1,305,381) Accrued pension cost $ (218,281) $ (1,610,867)

17 Notes to Financial Statements Note 10. Employee Benefit Plans (Continued) Post-Retirement Defined Benefit Health Care Plan Plan Assumptions Used Weighted-average assumptions used in computing ending obligations Discount rate 6.25% 6.00% Rate of compensation increase 4.00% Weighted-average assumptions used in computing net cost Discount rate 6.25% 6.25% Rate of compensation increase 4.00% Expected return on plan assets 7.50% Defined Benefit Pension Plan assets include life insurance policies and mutual funds and employer contributions were $ 513,600. No participant contributions are permitted by the Pension Plan. Pension benefit payments made during the years ended June 30, 2005 totaled $ 26,277. Actual paid contributions and benefits were $ 21,313 for the year ending June 30, 2005 for the post-retirement health care plan. For measurement purposes, a 14% annual rate of increase in the per capita cost of health care was assumed for 2006; the rate was assumed to decrease in 2% increments to 6% for 2010, then decrease to 5% for 2011 and remain at that level thereafter. The health care cost trend assumption has a significant effect on the amounts reported. For instance, increasing the assumed health care cost trend rate by 1% in each year would increase the accumulated postretirement benefit obligation as of June 30, 2005 by approximately $ 915,000 and the service and interest cost components of net postretirement health care cost for the year then ended by approximately $ 110,000. The South Carolina Student Loan Corporation established the 403 (b) Defined Contribution Plan on November 5, The plan provides for a 5% contribution by the Corporation based on the participant s total annual compensation. The total amount contributed under the plan in 2005 was $ 225,653, which the Authority reimbursed $ 88,553 for employees. All employees are eligible who have completed one year of service and attainment of age 21. Contributions are 100% vested when made. Employees are eligible to make voluntary contributions to the Plan. Certain health care, dental, long-term disability and life insurance benefits are provided to active employees. All full-time and part-time employees who worked at least 32 hours per week are eligible to receive those benefits. Employer contributions applicable to those benefits were $ 1,069,203 in Note 11. Operating Leases The Corporation leased office space under a lease that was to expire October 31, However, during March 2004, the Corporation purchased the land and building and currently leases office space to nine (9) tenants as of June 30, Certain lease expense is allocated to the Authority based on space occupied. Note 12. Rental Property and Operating Leases As described in Note 10, the Corporation purchased an office building. The Corporation occupies approximately 71% of the space. The building has lease agreements of varying duration. Future minimum lease payments are by year as follows: $ 86,659 in 2006; $ 84,979 in 2007; $ 56,827 in 2008; and $ 2,600 in 2009.

18 Notes to Financial Statements Note 13. Disclosures About Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of the Corporation's financial instruments. Cash and cash equivalents' carrying amounts approximate fair value because of the short maturity of those instruments. Student loan receivables' carrying value approximates fair value based on similar investments' quoted market prices. The carrying value of finance loans also approximates fair value based on the prices for the same or similar debt issues and on the current rates offered to the Corporation for debt of the same remaining maturities with similar collateral requirements. The Corporation intends to carry its investments and receivables to maturity. The Corporation also intends to carry to maturity the finance loans with the South Carolina State Education Assistance Authority. Note 14. Assets Released from Restrictions Net assets during the year ended June 30, 2005 were released from restrictions by incurring expenses satisfying the restricted purposes and by occurrence of other events specified as follows: Personnel $ 305,424 Contractual services 28,781 General operating 47,043 Interest on debt 34,204,327 TLP cancellations 6,392,751 Amortization of deferred cost of bond issuance 1,163,743 Payment to SC State Education Assistance Authority for student loan income 22,670,453 Loan fees 11,084,863 Reinsurance expense 236,745 Borrowers incentives 18,350,840 Broker dealer fees 2,070,901 Other 1,115,163 Total expenses 97,671,034 Transfers to the 04 Resolution for capital for issuance ( 18,312,265 ) Transfers to warehouse line for operations ( 122,660 ) Transfers to tax exempt bonds for operations ( 2,099 ) Transfers from taxable bonds for loan servicing 8,146,926 Total $ 87,380,936 Note 15. Reclassifications Certain reclassifications were made on 2004 amounts on the statement of financial position and the statement of activities for comparability to 2005 with no effect on the change in net assets. Note 16. Subsequent Event On July 19, 2005, the Corporation issued $ 700,000,000 in Education Loan Revenue Bonds that consists of three series. Series A-1 in the amount of $ 264,000,000 matures on December 3, 2018; Series A-2 in the amount of $ 210,000,000 matures on December 1, 2020; Series A-3 in the amount of $ 226,000,000 matures on December 1, The Bonds are issued as Senior Lien Bonds pursuant to a June 7, 1996 General Resolution and a Series Resolution effective as of July 7, The bonds will be used to refund the 1996, 1997 and 1998 bond issues as described in Note 6 totaling $ 376,400,000. The remaining amount will be used to finance student loans, fund a reserve and pay costs of issuance.

19 SCHEDULE OF FINANCIAL POSITION BY FUND JUNE 30, 2005 Unrestricted Temporarily Restricted Teacher Warehouse Tax Exempt Operating/SLC Loans Financing 96 Resolution 04 Resolution 93 Resolution 02 Resolution Total ASSETS Current Assets Cash and cash equivalents $ 16,740,489 $ 6,645,997 $ 7,992,372 $ 39,254,144 $ 49,970,995 $ 23,862,553 $ 13,064,205 $ 157,530,755 Investments 160, ,006 Current portion of student loan receivables 50,000 8,915,145 19,281, ,866,000 18,394,000 41,256,000 35,144, ,906,145 Interest due from borrowers 43,249 1,195, ,056 15,655,728 3,044,770 2,380,146 3,263,743 26,265,541 Due from United States Department of Education 26 3, ,116 7,312, ,293 2,489,154 2,816,608 14,056,898 Due from SC State Education Assistance Authority 448, ,065 5,000 70,135,969 29,286 22,396,296 93,170,694 Accrued investment income 3,365 50,410 10,060 94, , ,141 Miscellaneous operating receivables 12,061 12,061 Prepaid expenses 119, ,442 Due from (to) other funds 75,926 17,854 (35,388) 6,995 (60,387) (5,000) - Total current assets 17,652,642 16,984,821 28,714, ,325,786 72,135,513 69,982,853 76,684, ,480,683 Investments and Long-Term Receivables Other student loan receivables less, current portion 1,658, ,170, ,732, ,522, ,796, ,276,742 1,868,157,778 Teacher loans receivable - net allowance for teacher loan cancellations and current portion 5,294,788 5,294,788 Deferred cost of issuance of bonds 2,228, ,020 3,149,978 Total investments and long-term receivables 1,658,389 5,294, ,170, ,961, ,443, ,796, ,276,742 1,876,602,544 Property and Equipment Land 565, ,000 Building 2,431,329 2,431,329 Furniture and equipment 1,814,680 1,814,680 Automobiles 42,764 42,764 Less, accumulated depreciation (1,440,587) (1,440,587) Net property and equipment 3,413, ,413,186 Total assets $ 22,724,217 $ 22,279,609 $ 141,884,960 $ 1,329,287,121 $ 199,579,235 $ 393,779,677 $ 391,961,594 $ 2,501,496,413

20 SCHEDULE OF FINANCIAL POSITION BY FUND JUNE 30, 2005 Unrestricted Temporarily Restricted Teacher Warehouse Tax Exempt Operating/SLC Loans Financing 96 Resolution 04 Resolution 93 Resolution 02 Resolution Total LIABILITIES AND NET ASSETS Current Liabilities Current portion of notes payable - finance loans $ $ $ $ $ $ 41,256,000 $ 35,144,000 $ 76,400,000 Current maturities of bonds payable 225,169, ,169,000 Warehouse financing 141,133, ,133,909 Interest payable 2,075, ,400 2,244,985 Accounts payable 53, , , ,444 Accrued pension payable 218, ,281 Compensated absences 300,128 35, ,425 Retiree medical insurance payable 1,610,867 1,610,867 Due to SC State Education Assistance Authority 36,416 4,937,655 4,704,068 9,678,139 Total current liabilities 2,182,558 35, ,431, ,244, ,663 46,193,655 39,848, ,225,050 Long-Term Debt Bonds payable less, current maturities and bond premiums and discounts 906,855, ,000,000 1,086,855,912 Notes payable - finance loans less, current maturities 347,586, ,418, ,004,853 Total long-term debt ,855, ,000, ,586, ,418,831 1,782,860,765 Total liabilities 2,182,558 35, ,431,224 1,134,100, ,289, ,779, ,266,899 2,240,085,815 Net Assets Temporarily restricted for bond indentures Current debt service 26,101,084 26,101,084 Temporarily restricted for bond indentures 169,085,540 19,289,572 3,694, ,069,807 Temporarily restricted for teacher loans 22,244,312 22,244,312 Temporarily restricted for warehouse financing 453, ,736 Unrestricted 20,541,659 20,541,659 Total net assets 20,541,659 22,244, , ,186,624 19,289,572-3,694, ,410,598 Total liabilities and net assets $ 22,724,217 $ 22,279,609 $ 141,884,960 $ 1,329,287,121 $ 199,579,235 $ 393,779,677 $ 391,961,594 $ 2,501,496,413

21 SCHEDULE OF ACTIVITIES BY FUND Unrestricted Temporarily Restricted Teacher Warehouse Tax Exempt Revenue Operating/SLC Loans Financing 96 Resolution 04 Resolution 93 Resolution 02 Resolution Total Income from United States Department of Education student loan interest - subsidized $ 14 $ 1,741 $ 97,252 $ 8,534,072 $ 654,924 $ 3,331,798 $ 2,624,145 $ 15,243,946 Special allowances 88 4, ,438 14,442, ,293 15,321,834 5,626,244 37,139,820 Student loan interest - non-subsidized 323,508 1,663,129 1,389,506 45,007,982 3,340,442 6,918,847 8,698,892 67,342,306 Investment income 295, ,190 22,358 1,448, ,381 34,040 2,773,756 Unrealized gain (loss) on investments 11,820 (118,511) (106,691) Late charges 1,880 14,370 12,928 1,144,595 20,577 42, ,595 1,372,093 Miscellaneous payments of student loans 1, , ,130 State appropriations - Department of Education 4,831,932 4,831,932 Building rental income 194, ,776 Remittance from SC State Education Assistance Authority for operating cost 4,198,752 4,198,752 Total revenue 5,026,258 6,622,497 2,332,496 70,580,737 5,699,689 25,614,958 17,119, ,995,820 Expenses Personnel 5,913, ,424 6,218,889 Contractual services 801,465 28, ,246 General operating 1,649,577 47,043 1,696,620 Interest on debt 1,300,392 29,762,235 3,141,700 34,204,327 TLP cancellations 6,392,751 6,392,751 Amortization of deferred cost of bond issuance 1,139,855 23,888 1,163,743 Payments to SC State Education Assistance Authority for student loan income 12,773,101 9,897,352 22,670,453 Loan fees 421,606 5,187, ,361 3,084,861 2,254,946 11,084,863 Reinsurance expense 221, ,471 12, ,745 Borrower incentives 2,434 3,936 31,334 1,347,234 20,928 9,755,525 7,191,883 18,353,274 Broker dealer fees 4,095 1,761, ,125 2,070,901 Building rental expenses 339, ,723 Other (135,821) 59, , ,258 (63,094) 979,342 Total expenses 8,570,843 6,836,941 2,001,420 39,419,810 4,503,962 25,614,958 19,293, ,241,877 Transfer Between Accounts Transfers in 8,146, ,660 22,884 18,588,046 2,099 26,882,615 Transfers out (18,437,024) (7,951,390) (494,201) (26,882,615) Total transfers between accounts (10,290,098) - 122,660 (7,928,506) 18,093,845-2,099 - Change in net assets (13,834,683) (214,444) 453,736 23,232,421 19,289,572 (2,172,659) 26,753,943 Net Assets Beginning 34,376,342 22,458, ,954,203 5,867, ,656,655 Ending $ 20,541,659 $ 22,244,312 $ 453,736 $ 195,186,624 $ 19,289,572 $ - $ 3,694,695 $ 261,410,598